“The ETF industry, which has got to be the greatest marketing idea of this age, is not the greatest investment idea of this age, I can assure you.” – Jack Bogle
There is a great deal of writing about Exchange Traded Funds (ETFs) and their supposed ‘superiority’ on the internet; much of it written or sponsored by the fund providers themselves. While there may be some merits to this investment product in certain situations, in our opinion there are more shortcomings. But before we get too deep into our disdain, let’s take a step back and answer the question: “What is an ETF?”
What it Means to Own an ETF (or Mutual Fund)
Any fund is essentially a grouping of assets designed to track a market sector or follow a specific strategy for investing. One of the main benefits of a fund is that you can quickly get a diversified portfolio. But there are a few problems with this approach, the main issue being customization. With a fund, the underlying holdings can’t be tailored to your individual needs. This means that anyone who buys the fund will get the exact same portfolio. Other advisors get around this by constructing a portfolio using multiple funds for their clients. However, at the end of the day, those financial advisors have no control over the individual assets within the funds.
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Another issue is pricing. On top of whatever a financial advisor charges, each fund you own costs you money! An average ETF will cost you about 0.44%1 of your invested assets annually and a mutual fund will cost about 0.90%2. This fee covers the management of the fund, but in our opinion, that’s a lot for a cookie-cutter product. On top of that, these fees are often hidden and come directly out of the returns generated by the fund. With the lack of transparency, customization, and high fees for the value you get, you can see why we dislike ETFs and mutual funds so much. So what do we buy our clients instead? Individual equities.
Equities Defined and Their Benefits
An equity is simply a stock synonym. Why is it called an equity? Well when you purchase a stock, you get a percentage of ownership in a company; in other words, equity in the company. The chart below compares buying individual equities using our investing philosophy, and funds such as ETFs.
You might be asking yourself, “with all the benefits, why don’t other advisors construct pure equity portfolios rather than using funds?” We can’t speak for each individual advisor, but simply put – it’s easier. Constructing pure equity portfolios is hard and time consuming work which is why DIY investing might not be the best fit for busy professionals. While there certainly are advisors that can customize a portfolio made of equities for you, typically their minimum account balances are well into the six digits and they charge a higher fee for their efforts. By using our proprietary technology, we’re able to automate some of that process and reduce costs. This lets us keep account minimums and prices low at $2,000 and 0.60% respectively.
Learn more: How we construct and tailor portfolios
Tying it All Together
A great analogy that will help you remember the difference between equities and ETFs is to think of grocery stores. In this scenario, an ETF is the entire grocery store and an equity is an item on the shelf. To buy an ETF is to buy the entire store including everything on the shelves. The reality is that we all have different diets and appetites when it comes to food. And that’s also true for investing. Just as there are certain foods that don’t agree with you, there are certain companies that might not either.
The same analogy applies to DIY investing. You probably spend some time at the grocery store reading labels and picking foods that you like. While you might not know every single ingredient, you can probably make a good decision. Unfortunately, picking equities is much more complicated than that. Not only would it take longer to manage your own equity portfolio than a trip to the grocery store, making a mistake is also more detrimental than buying the wrong kind of salsa.
At Emperor, we get to know your investing appetite and understand which ingredients make up a great company. If you want to get a tailored pure equity portfolio today that’s designed to earn passive income and achieve your goals, you can start investing here.
1 – http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/
2 – https://www.forbes.com/2011/04/04/real-cost-mutual-fund-taxes-fees-retirement-bernicke.html#100df32a3244
Exchange Traded Funds (ETFs) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.